CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
An Accessory Dwelling Unit (ADU) is a broad term that refers to a second residential unit situated on the same lot as an existing primary home. ADUs come in various forms, such as a standalone backyard house, a retrofitted garage, or an annex (i.e. a self-contained living space) connected to the main building.
During the 1930s Great Depression and the post-World War II housing shortage, ADUs emerged as a popular and widespread housing solution. The federal government actively encouraged homeowners to create these secondary housing units.
However, in the 1950s and 1960s, the rapid growth of suburbs led to a filtering process that freed up urban dwellings for those with fewer financial resources. During this period, zoning laws and building regulations became more restrictive, resulting in ADUs being prohibited in several municipalities, particularly in suburbs.
Amid the 1970s stagflation—a period characterized by high inflation and unemployment and slow economic growth—ADUs made a comeback. Homeowners in suburbs began renting out basement suites, refurbished garages, and backyard buildings to meet basic housing needs. Despite often being illegal, these suites served as essential housing solutions during this time.
ADUs and the current housing crisis
Allowing homeowners and landlords to benefit from building and managing ADUs is critical to addressing the current housing crisis, but there are a number of barriers that first need to be addressed.
First, while mortgage insurers permit potential homeowners to include rental income in their mortgage policies, this primarily supports existing rental units rather than encouraging new unit development.
Second, a homeowner could refinance their home or take out a home equity line of credit (HELOC) to finance the building of an ADU, but they must first be motivated to build this kind of unit, which involves navigating their city’s planning department, securing construction and takeout financing, hiring a contractor, and subsequently managing the property. Buying a condo is a much easier option. Homeowners don’t have to deal with concerns around permits, red tape, project viability or product market fit when purchasing a condo.
Cities are currently allowing up to fourplex units to be developed “as-of-right” (i.e. without obtaining formal approval) within a single lot to qualify for the Housing Accelerator Fund, a $4 billion federal program that provides incentive funding to local governments to encourage initiatives aimed at increasing housing supply. If this “as-of-right” provision also allowed for stratification – i.e. the division of existing lots – to create ADUs, it would present an opportunity to build ADUs at scale.
By allowing for stratification, the ADU can be owned and financed separately from the main building. This would provide homeowners with the flexibility to handle this themselves, partner with another party, or sell the ADU unit to a different group.
The biggest benefit of stratification is that it would allow entities like social purpose Real Estate Investment Trusts (REITs) to own and operate ADU units. This could potentially attract substantial investment for this type of housing on a larger scale. Although managing ADUs often requires more effort, time and resources than managing other property types, this did not deter investment funds from investing in single-family home rentals in the US. This is encouraging evidence that the model can work.
We haven’t addressed the most significant hurdle to expanding ADUs, which is development funding. For scattered site ADU development to become a crucial part of an affordable housing strategy, policymakers must allow this type of development to access existing affordable rental housing tools. Why can’t a project of five or more units across an urban area have the same access to development funding as a project with multiple units in a single structure in one location?
If the Canada Mortgage and Housing Corporation (CMHC) allocated a portion of its Rental Construction Financing Initiative (RCFi) program, aimed at encouraging the construction of sustainable rental apartment projects across Canada, for this approach, it would incentivize institutional investment in ADUs. Developers could consolidate these units into a “multifamily pool” and then secure takeout financing through government-sponsored National Housing Act (NHA) mortgage-backed securities (MBS) pools, or they could fund the completed units in a Real Estate Investment Trust (REIT).
Additionally, there’s an opportunity to establish a program that could expand and accommodate the construction of manufactured housing on a larger scale. This approach would result in a more efficient use of resources, optimizing skilled labor and minimizing disruptions within neighborhoods during the installation of these units. Employing a manufacturing approach for these units, particularly with takeout financing in place, would facilitate an efficient deployment of development funds.
To encourage more housing development, the government must be more creative with the way it uses its existing housing finance tools and introduce greater funding program flexibility.
Independent Opinion
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